Historical Cost and Conservatism Are Joint Adaptations That Help Identify Opportunity Cost

Although the other contributors generally agree with what I have written in my article, I think that the following statement by Basu and Waymire (2017) summarizes the relationship between my article and the subsequent essays and comments in the best way: "Braun (2017) ignores the contracting use of accounting principles because he abstracts away from all stewardship, accountability and contracting issues." I would like to explain briefly my perspective on this matter.The reason why I became interested in questions of financial accounting as an outsider stemmed from my research on capital and entrepreneurship. I wanted to augment my knowledge about economic calculation with how it occurs in actual business life. While studying the relevant literature, I learned that there are basically two competing approaches to financial accounting. My impression was that their respective theoretical foundations differed strongly in character. The balance-sheet approach is based or at least is closely related to today's neoclassical economics. The adherents of the revenue-expense approach, on the other hand, do not systematically rely on a coherent theoretical system; the American institutionalism and the German historical school that could serve as a proper foundation (Biondi, 2013) live in the shadow nowadays. Here and there I found some short remarks on the relationship between Prospect Theory and the principles of historical costs and conservatism that sounded promising to me, yet had not been elaborated at greater length. That is the gap in the literature that I thought needed to be filled and that led me to write the article even though I was well aware of my status as a non-specialist.Basu and Waymire are therefore correct in their statement quoted at the outset of this short rejoinder when they point out the limitations of my article. I welcome the important and necessary comments and criticisms, made by several renowned accounting theorists included in this volume. I would also like to use this opportunity to thank all contributors for applying so much effort to clarifying and shaping those issues that I covered only unsatisfactorily or not at all.Whereas I made a general point about the relationship between neoclassical economics and the balancesheet approach, Baker (2017) adds his knowledge of the current state of the accounting regulations which are (as yet) far from following the balance-sheet approach completely. Baker also provides some historical perspective by referring to the discussion of the two approaches to financial accounting in the German Reich.Tang (2017) adds the idea that the choice between the balance-sheet and the revenue-expense approaches depends on the function that accounting is to serve. If we need periodic information on either the value or performance of a firm in the capital markets, the balance-sheet approach will be, under certain conditions, the appropriate choice.Basu and Waymire (2017), like Tang, point out where and how far fair-value accounting could be the better choice in certain s...

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The reason why I became interested in questions of financial accounting as an outsider stemmed from my research on capital and entrepreneurship.

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mentioning

confidence: 56%

Concluding Remarks on the Symposium on the Evolutionary Advantage of Cost Accounting and Conservatism

Braun

2017

“…The driving force for the market tendency toward equilibrium is "the daring, imaginative, speculative actions of entrepreneurs who see opportunities for pure profit," and pure profit here is also referred as pure entrepreneurial profit (Kirzner, 1997). Braun (2016) and Basu and Waymire (2017) explicate the role of the traditional accounting principles in the market as an entrepreneurially driven process. Basu and Waymire (2017) argues that historical cost and conservatism jointly propel entrepreneurial discovery by helping a decision-maker to specify the set of profit opportunities given local conditions.…”

Section: Origin and Attribution Of Business Profitmentioning

confidence: 99%

“…Braun (2016) and Basu and Waymire (2017) explicate the role of the traditional accounting principles in the market as an entrepreneurially driven process. Basu and Waymire (2017) argues that historical cost and conservatism jointly propel entrepreneurial discovery by helping a decision-maker to specify the set of profit opportunities given local conditions.…”

Section: Origin and Attribution Of Business Profitmentioning

confidence: 99%

Rethinking the Concept of Equity in Accounting: Origin and Attribution of Business Profit

Otaka

2024

In this paper I reconsider the concept of equity in corporate accounting from the perspective of the origin and attribution of business profit. In both Financial Accounting Standards Board’s (FASB’s) and International Accounting Standards Board’s (IASB’s) Conceptual Frameworks, shareholders’ equity is synonymous with a firm’s net assets. However, it is not the sole definition of equity. We may regard equity as the interest in the corporate capital itself. From this viewpoint, shareholders’ equity consists of retained earnings attributable to shareholders’ as well as invested capital provided by them. We should note that, under the current corporate accounting system, shareholders are assumed to be the sole residual claimants. However, the existence of implicit contracts in corporate activities implies other residual claimants in addition to shareholders. If shareholders are not the sole residual claimants, it is necessary to revisit the proprietary theory under which equity is identical to shareholders’ equity. In this paper I reconsider the significance of the entity theory, which emphasizes an entity as an organization comprising various stakeholders and attributes business profit above shareholders’ expectations to an entity itself. The ownership interest cannot generate the excess profit by itself. Without firm-specific investments by employees and/or entrepreneurial activities by managers, the excess profit would never emerge. We should critically examine the foundation of the current corporate accounting in order to design a more equitable and efficient corporate accounting in which business profit is attributable not only to shareholders but also to other stakeholders who contribute to its generation.

Accounting for Market Equilibrium – Comparing the Revenue-Expense to the Balance-Sheet Approach

Braun

2019

This paper combines the market process approach developed by the Austrian School of Economics with the theory of capital as worked out by the Historical School in order to provide a suitable framework for discussing the two competing approaches to financial accounting. Within this framework, it becomes clear that the revenue-expense approach with its emphasis on actually realized, historical transactions plays an important role in creating a tendency towards market equilibrium. Net income determined according to this approach provides information to the market on where there are gaps in the price structure. The balance-sheet approach, on the other hand, and particularly fair value measurement take market equilibrium for granted. Based on fair value accounting, an equilibrium could never be accomplished in the first place. Ironically, in order to be applicable, the balance-sheet approach presupposes the perfect working of the market process, including financial reporting based on the revenue-expense approach.